Our Blind Spots Cut Retirement Savings

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Our personal biases can play havoc with how we handle our finances.

Two such biases have long been suspected as obstacles to saving for retirement. The first is a tendency to procrastinate on decisions that may benefit an individual in the long run, but also involve short-term costs, like saving for retirement – economists call this “present bias.”

The second bias is a failure to perceive the power of compounding investment returns and how this can build wealth over decades of saving.

But the impact of these biases on how much people actually save wasn’t really understood – until now.  A new study by a team of economists from Stanford University, the University of Minnesota, the London School of Economics, and Claremont Graduate University finds that people who are not blinded by these two biases in particular have saved significantly more for retirement, largely because they start putting money away earlier in life.

The researchers based their findings on a big sample of nearly 2,500 people in online surveys in 2014 and 2015; the average age was about 49. To determine the consistency with which they value the present over the future, the survey asked the participants a series of questions about whether they would, for example, rather have $100 now or a larger amount on some future date – people who want their money now are a bit like Wimpy from the Popeye cartoons, who became famous for wanting a hamburger now but offering to pay for it later. The survey questions about compounding revolved around estimating an account’s future value, using a variety of different interest rates and time periods.

Controlling for age, income, education, general financial literacy, IQ, and other influences on saving, the people who are not present biased had, on average, about 19 percent more in savings than those who value tradeoffs much differently over the short term and the long term. Those who accurately perceived the power of compounding had about 20 percent more than those who neglect compounding completely.

Another interesting finding is that these are two distinctly different blind spots, and the vast majority of us suffer from at least one, and often both. About 55 percent are procrastinators and nearly 70 percent fail to appreciate the power of compounding, according to the study.

Many Americans haven’t saved very much for retirement, because their employers don’t offer 401(k)-style savings plans. But many employees have the opportunity and still don’t save enough. This study helps us to understand why, as well as how much our biases matters.

The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.


What compound interest? There isn’t any.

The interest we should be getting is going to the banks to prop them up. Will this postpone their failure? Fed is taking no chances. That’s why bail-ins are next followed by no cash, negative interest and capital controls.

No way to save for retirement anymore. Wall Street can borrow money for nothing and buy up everything. That is why the asset prices are high and there is a bubble in real estate.

Paul Brustowicz

Not having a 401(k) available is no reason for not saving for retirement. (Too many negatives in that sentence?)

There was a study several years ago that found that employees with 401(k)s were leaving money on the table by maxing out the employer matching contribution.

I am a scientist at heart and tend to believe the results of good studies, but my right-brain tells me it is more procrastination than understanding compound interest. Most folks are lazy about saving and need to be pushed into making tough monetary decisions such as retirement savings, life insurance and saving for a six month emergency fund.


There have been a number of reports in the press about government looking longingly at the trillions of dollars socked away in IRAs and 401(k)s, and perhaps considering a way to tax Roth IRAs. Some notable people have actually talked about appropriating those retirement accounts and giving the owners a set amount each month, or means testing Social Security.

This sort of talk serves to make people nervous about putting money away. Why save if it’s not going to be all yours someday?


I don’t think a lot of people understand the power of compounding. It either works for you or against you.

Here is a simple illustration – http://stretchadime.com/power-of-compounding/

The sooner you start investing into your retirement account in life, the better off you are.


The personal savings rate is a function of the surplus of income over costs. The press emphasizes the problems facing young people who must pay down debt before they can save. The problem of middle aged people is ignored — their wages have lagged behind their expenses and debt was used to maintain the standard of living they assumed was normal. Now many understand it wasn’t sustainable, leading only a few to start saving because mostly they cannot save!

    Carol Kruger

    How right you are. Too few jobs pay enough to have money left over to save! People did not see this economy coming. Save for the future, because no one knows the future. Set as much aside as you can! Get ready for it! Teach your kids to save half of the money that comes into their hands, the best training you can give them and try to live frugally yourself.

Murray Gendell

There is an important link between starting early and benefiting from the power of compounding. The return on one’s savings or investments doubles in about 70, divided by the rate of return. For example, at 5% it takes about 14 years, at 7%, 10 years. So, it would take about 42 years to double your money three times, but a bit less, 40 years, to double four times. Since the doubling sequence is 2, 4, 8, 16, the last doubling is twice as great at 7% than at 5 (16-8=8 vs. 8-4=4). Starting early gives one a much better chance to be financially ready for retirement. Fluctuations in the timing and size of the return on investments can change the results to some extent, but the compounding effect would likely still be strong, especially with an early start. Imagine if you had enough time to get to 32, giving you a 16-fold increase in assets.

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